Pre-Incorporation Contracts of Promoters
Persons who enter into contracts on behalf of a corporation yet to be formed are considered "promoters." Such pre-incorporation contracts raise issues regarding the rights and liabilities of the promoter and the new corporation.
Promoter Rights and Liabilities
When a promoter enters into a contract on behalf of a corporation to be formed, the promoter may be considered personally liable to meet the obligations of the corporation if for some reason the corporation is not formed or does not adopt the contract. When the pre-incorporation contract is made, the corporation is not in existence and therefore cannot be a party to the contract. The promoter thus must be a party to the contract, and, under agency law principles, the promoter will be personally bound as an agent acting on behalf of a non-existent principal.
Intent of the promoter and the other party to the pre-incorporation contract to bind the corporation normally is not an issue because the contract is entered into by the promoter on behalf of the corporation. However, an intention that the promoter should not also be personally liable under the contract should be made clear in the contract. Personal liability of the promoter may be avoided if the intent of the parties to avoid such liability is clearly expressed in the promoter's contract and if fairness suggests that the promoter should not be held personally liable.
To ensure avoidance of personal liability of the promoter, it should also be made clear to the other party to the contract that the corporation on behalf of which the contract is agreed upon has not yet been formed. If there is adequate consideration from the promoter, a provision in the promoter's contract that only the corporation to be formed may be looked to for performance may effectively avoid personal liability of the promoter.
If the promoter remains concerned about the possibility of personal liability, an option to enter into an agreement might be considered in lieu of an agreement by the promoter. The corporation, once formed, then could act upon the option. The promoter should keep in mind that even if an agreement by the promoter is adopted by the corporation, personal liability of the promoter may continue unless a specific provision in the agreement removes such personal liability or provides that adoption of the agreement shall constitute novation by the corporation of the agreement.
Corporate Rights and Liabilities
Because the corporation named in the promoter's contract has not been formed at the time the contract is made, the corporation when formed is not bound by the contract. However, adoption of the contract is anticipated by the parties to the contract. If the corporation in fact adopts the contract, then it will assume those rights and liabilities set out in the contract.
The promoter's contract may be adopted by the corporation formally through a resolution of the board of directors or informally through performance of the obligations of the contract in such a way as to indicate that the corporation has adopted all of the essential terms of the contract.